Main navigation

Tax Gains on Residential Properties – Update on “Bright-Line” Test

The new “bright-line” test to tax gains on residential properties sold inside two years of ownership has taken a more comprehensive shape now that the public consultation period is over and the relevant Bill has been sent to Parliament for approval.

Readers of previous items on this topic may be broadly familiar with the intended workings of new section CB 6A but we have summarised the essential features here as well as identifying a few fish-hooks for the unwary:

The new law will come into force on 1 October 2015. From this date all land registrations must be accompanied by a tax statement from both the vendor and the purchaser unless the transaction is a “non-notifiable” transfer because it is subject to one of several exceptions.

The main exception is property which was the “main home” for the vendor and which will be used for the same purpose by the purchaser. Where somebody has more than one home the “main home” will be the one they have the closest connection with.

If a vendor has already used the main home exception twice in the preceding two years, that exception cannot be used a third time – ie three strikes and you’re in.

There are also exclusions for properties which have been inherited or acquired as a result of relationship property agreements.

Details to be provided for notifiable transfers include an IRD number and confirmation of residency and citizenship status. “Offshore persons” will include a NZ citizen who has been physically absent from the country for three years, resident class visa holders who have been absent for 12 months, and anyone else who is neither a citizen nor a resident.

Offshore persons will also include any non-individuals which are owned or controlled by the types of people identified above (the threshold to trigger this inclusion being set at 25% or more of beneficial interest).

All information declared as part of the new rule will be collected by conveyancers and provided to LINZ, which in turn will provide the information to IRD.

Trustees must provide tax information including IRD numbers for every transfer they are party to. Notwithstanding that obligation trusts will be eligible to claim the “main home” exemption for the property which serves as the family home of a beneficiary or settlor of the trust.

As is common with other areas of tax law, nominees must provide details about any principal whose interests they represent.

It will be an offence to knowingly give false information when required to do so under the reforms. Having said that, however, there will not be any liability for any person who unintentionally provides incorrect information.

Losses from the two-year rule will be ring-fenced. That means they can only be offset against taxable gains on other land transactions under any of the land sale provisions in subpart CB of the Income Tax Act.

Importantly no loss will be recognised under the new rule if it is attributable to the transfer of property between “associated persons”. This is potentially a very big trap for the unwary because the definitions are very wide for tax purposes and virtually impossible to avoid.

One of the interesting aspects to emerge from the short but widely subscribed public consultation process was that a number of heavyweight submitters supported the law changes and associated policy objectives, chief of which is to improve compliance with the land taxing provisions and to obtain better information from all people dealing in New Zealand property. We note that broad support was expressed in this regard by the Auckland District Law Society, Chartered Accountants Australia and New Zealand, the Bankers Association, the Real Estate Institute and the Property Investors Federation.

If you need advice on the new legislation or any other land taxing rules, including the range of exclusions that exist, please contact your usual advisor at Johnston Associates South for guidance.